The SEC is focusing on educating the retirement planning industry about the likely
impacts of money market fund reforms adopted in 2014. In short, the
rule amendments require providers to establish a floating net asset value (NAV)
for institutional prime money market funds, which will allow the daily share
prices of these funds to fluctuate along with changes in the market-based value
of fund assets. The rule updates also provide non-government retail money
market funds with new tools, known as liquidity fees and redemption gates, to
address potential runs on fund assets.

The retirement space is still in the
process of digesting the rule changes. The good news is that sponsors and
advisers have until October 2016 to decide how they will address the nearly 900-pages of rulemaking.
But the timeline is tighter than some may think, given
the complexity of money market funds and the potential for a late-mover premium
should too many sponsors wait until the last minute to make changes.

One important section of the rulemaking for plan sponsors
and service providers to understand starts at page 225, running through about
page 271. The passage contains helpful discussion of what it takes to qualify
as a retail money market fund, and how floating NAVs will be calculated and
applied, along with guidance about the fees and redemption gates that have
caused some Employee Retirement Income Security Act (ERISA) fiduciaries to
doubt whether they’ll still be able to offer retail money market funds.

This is a common misconception—that retirement
plan fiduciaries will be flat out required to start using government-sponsored money market funds, which will not gain the use
of liquidity fees and/or redemption gates. In fact this is not the case, and the rules provide important exceptions for investing in
retail money market funds that could ease plan sponsors’ fiduciary concerns.

NEXT: Important NAV exceptions

Critical for plan sponsors to understand is the fact that there
is an exception for the floating NAV requirement for any money market fund that
is a retail fund—and retail funds are defined under the new rulemaking as funds
in which only natural persons can invest.

The money market fund rulemaking
generally understands DC retirement plans as collections of natural persons,
rather than as a distinct class of institutional investors. This, in turn,
means most DC plans will be able to continue to invest in retail money market
funds.

A big question for plan sponsors will be whether they feel comfortable,
considering their fiduciary duty, with the prospect of plan participants
potentially facing liquidity fees and gates within retail money market funds.
The impact of these gates could potentially be dramatic, should a situation like
the 2008 financial crisis occur again. In certain cases of stressed liquidity for
a retail money market fund, a liquidity fee would go into place that could
damage plan participant returns. In other cases, a redemption gate could be
implemented, lasting up to 10 days, preventing all withdrawals from a money
market fund.

Redemption fees and gates are not necessarily
at odds with the fiduciary duty, especially if plan sponsors do a good job
educating their plan participants up front about the money market fund changes. Indeed,
the whole point of implementing liquidity gates and fees is to protect investor
assets against sharp drops resulting from runs on money market fund assets. It
could be distressing for a plan participant to face a liquidity fee or
redemption gate, but plan sponsors can protect themselves from liability by educating
participants about this possibility, and coaching them to stick with their long-term
investing goals even during short-term periods of market stress.

NEXT: Other money
market fund considerations

Plan sponsors and advisers should also be prepared
to face changes coming from fund providers and recordkeepers.

Even in cases where a DC plan decides it is comfortable
sticking with its current money market fund option, the plan’s recordkeeper or
investment provider could decide change is necessary. This situation is likely to
be faced by at least some plan sponsors, given that more and more fund
providers are adding and changing options to get ready for the rule implementation
in fall 2016.

Something else to consider is that it will be harder, if not
impossible, for defined benefit (DB) plans to qualify as natural person
investors. Therefore DB plans are probably likelier to have to switch to
government money market funds, or another similar asset class.

Both DB and DC sponsors will have to be vigilant with
regards to their recordkeeper’s shifting capabilities under the rulemaking. There are still a lot of operational systems issues that need to be
addressed to ensure that the liquidity fees and redemption gates can smoothly
go into effect.

On its website, the SEC urge retirement planning professionals to read a
recently issued FAQ publication that addresses a number of retirement plan-related issues under the money market fund reforms. In particular FAQ 16
(which explains issues related to retail funds) and 17 (about forfeiture accounts)
as well as FAQs 26-31 about the operation of fees and gates may all be of interest.